The consumer lending industry bases its decisions to grant credit or make loans, or to give consumers preferred credit or loan terms, on the general principle of risk, i.e., risk of foreclosure. Essentially, credit and lending institutions typically avoid granting credit or loans to high risk consumers, or grant credit or lending to such consumers at higher interest rates or other terms less favorable than those typically granted to consumers with low risk. As a means to label risk and allow for relative comparison between individual consumers, lenders use a consumer's credit score. A consumer's credit score is determined, in part, through analysis of the various accounts the consumer is responsible for or has access to. These various accounts are referred to as trade lines and show up as independent line items on the consumer's credit report. Credit scores are well-known industry measures of credit risk, such as the VantageScoreSM credit score or the FICO credit score, and are typically based on proprietary algorithms and statistical analyses of consumer data that result in a scoring number within a given range, such as, for example, 501-990. This number correlates to a probability of negative performance, and acts as a predictor of credit risk. The higher the credit score, the less risk posed, and vice-versa.
In conjunction with credit scores, most credit and lending institutions also employ other underwriting criteria to evaluate the credit risk presented by credit and loan applicants, and approve or reject those applicants based on that evaluation. If the applicant is approved, the lender will offer a pricing structure that reflects the risk presented by that customer, so that an appropriate risk-return dynamic is maintained.
Because of the importance placed on credit scores and underwriting criteria with respect to consumer lending and credit, many high risk consumers are motivated to try and increase their credit scores or otherwise improve their credit risk profiles in order to be perceived as less risky by credit and lending institutions, and consequently achieve more favorable consumer lending treatment. This motivation has given birth to an industry of brokers who “rent” trade lines of low risk consumers to high risk consumers by adding the high risk consumers as authorized users to one or more of the low risk consumer's trade lines in exchange for a “rental” fee. In operation, the broker approaches a low risk consumer and offers her a percentage of his fee for the use of her trade lines. The broker then sells access to the trade lines to a high risk consumer. However, in theory, there is no actual usage of the trade lines by the high risk consumer because the high risk consumer does not know the account numbers, or even the identity of the low risk consumer. The low risk consumer simply adds the high risk consumer's name as an authorized user to her trade lines and the trade lines appear on the high risk consumer's credit report. The low risk consumer essentially acts as a “landlord” for the trade line. As an authorized user of a low risk trade line, the high risk consumer is benefited by the good credit behavior of the “landlord” as the risk associated with his or her credit appears lower, e.g. his or her credit score increases. While this practice is legal, it is deceptive in that it misrepresents the risk associated with the high risk consumer's credit.
Under the 1974 revision of the Equal Credit Opportunity Act, the relationship individual consumers have to a given trade line is classified into one of several defined categories. These categories are well known within the lending and credit industries. One such category is “authorized user.” The Act defines an authorized user as an individual who may use a trade line but has no financial responsibility for any resulting balance owed. Though there are many other categories (i.e. individual, contractually liable, participating, etc.), they generally all cause an individual to incur a financial responsibility to pay off debt associated with the trade line. Thus, the authorized user category is unique in this sense. For purposes of convenience, all categories other than “authorized user” will herein be classified as “non-authorized user” or “base user.” Accordingly, a “non-authorized user trade line” is herein a trade line for which the consumer is a base user and is at least partially financially responsible for debts incurred.
Based on the foregoing effects, a perceived credit risk is defined, which can potentially be very different from an actual credit risk for the same subject consumer. FIG. 1 graphically illustrates a perceived credit risk in connection with credit approval caused by the presence of authorized user trade line. FIG. 2 graphically illustrates a perceived credit risk in connection with the cost of credit caused by the presence of authorized user trade line.
Before proceeding, it will be helpful to define certain terminology commonly used within the industry in defining the status of specific trade lines, as these terms are often used herein in association with describing certain characteristics used for analysis. Trade lines may be either open or closed. Open trade lines are available to the consumer to use. Closed trade lines are those the consumer no longer has access to for additional credit. Trade lines may also be active or inactive. Though different lending institutions utilize different cutoff points to label a term “active,” whether or not a trade line is considered active depends generally on the level of activity on that trade line within a given period of time (i.e. whether there is a balance in the account, the amount of that balance, and how frequently/to what extent the balance is changing based on transactions). Whether a trade line is open or closed is thus a separate concept from whether it is active or inactive. A trade line might be open, but inactive (e.g., an available credit card that is not used and has no balance). Alternatively, a trade line might be closed, but active (e.g., a cancelled credit card with a remaining balance due).
Another important status designator is “terminated.” This term only corresponds to authorized user trade lines. When an authorized user is removed from an account, e.g. by the primary account holder, the authorized user is said to be terminated. As a result, the corresponding trade line on the authorized user's credit report will appear as a terminated authorized user trade line. Of particular importance to the problem of “renting” trade lines to authorized users as set forth above is that, regardless of the status of a trade line (e.g., open, inactive, terminated, etc.), it will remain in existence on a consumer's credit report, potentially indefinitely. Accordingly, the trade line's ability to impact a credit score may be permanent but for the tools provided herein.
The present invention addresses these and other problems through the application of systems and methods designed to offer credit and lending institutions tools to effectively identify and address various effects of authorized user trade lines, including intentional abuse of authorized user trade lines to misrepresent credit risk and unintentional effects of authorized user trade lines on credit risk.